Monday, July 22, 2019
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Is Inflation Rising, New Forecasts and Mortgages?

 

Inflation is increasing in May, according to data provided by the statistics office of the European Union, Eurostat . The recovery of inflation is certainly an encouraging figure for the economy in general, and will probably be well seen by Draghi and the European Central Bank. However, some apprehensions can be aroused by the performance of the Euribor and variable rate mortgages . Let’s see why.

Eurostat inflation data for May

 Eurostat inflation data for May

The data published by Eurostat show an inflationary trend for the month of May which is growing and above expectations.

Inflation in the Euro area, in fact, went from 1.2% in April to 1.9, a value higher than forecasts , which stood at 1.6%. The increase is significant even if we refer to underlying inflation , or rather that which is considered to be net of components with more intense variability: in this case, the value is 1.1%, 0.4% more than at the same value as in April.

The increase in inflation and the European economy

 The increase in inflation and the European economy

This significant increase in inflation will obviously have to be confirmed in the coming months, but it could be a sign of a better state of health of the European economy. It is no coincidence that one of the main objectives of the economic policy of the European Central Bank is to bring inflation back to values ​​close to 2% . The objective of the ECB obviously does not refer to a single monthly survey, but to a recovery of inflation over a longer period of time, without exceeding too much the target value.

The economic policy of the European Central Bank

The economic policy of the European Central Bank

As noted, the economic policy of Draghi in recent years has been characterized by the need to stimulate the economy and, as has been said, to favor a recovery in inflation. In particular, the main instruments used were Quantitative Easing (or the purchase of government bonds by the ECB) and a particularly low interest rate policy. According to Draghi’s intentions these measures should be reduced in 2018 and in the first half of 2019, in the wake of a consolidated recovery and a satisfactory inflation rate. In recent months, several times this hypothesis of reduction of the measures put in place in the last few years has been questioned, in particular by still low values ​​of inflation. In general, the European Central Bank tends to always keep the door open to further stimulus to the economy, should this become necessary.

This is why Draghi can probably look at the May figure with some optimism, as it could go in the direction of a “normalization” of the measures supporting the economy, as it would be in the programs. But obviously, for this to happen, it is necessary that the data is confirmed in the coming months

 

The impact of rising inflation on Euribor and variable rate mortgages

 

 The impact of rising inflation on Euribor and variable rate mortgages

 

However, not all of these news are pink and flowers for consumers. In fact, one wonders if the forecasts on the Euribor could change and , consequently, on the variable rate mortgage installment, at least for all those who have the interest rate indexed to the Euribor .

Also read: What is the Euribor and how is it calculated

In fact, an increase in rates by the ECB would also lead to an increase in Euribor . According to current forecasts rates should remain unchanged throughout 2018 and even at the beginning of 2019. An increase in inflation could, if not accelerate these maturities, at least confirm them. The particularly favorable period for those who have opted for a variable rate mortgage may therefore not last that long.

The increase in inflation in Italy

 

The increase in inflation in Italy

 

Also in Italy an increase in inflation was recorded, with a value on an annual basis of 1.1% (it was 0.5% in April).

In particular, if we look at the sectors that have contributed most to this increase in inflation, we find unprocessed food, energy and transport. For the latter, in particular, we have gone from a negative figure (-0.7%) to a positive one (+ 1.7%)

The effect on the balance sheet of Italian families

 

However, price increases immediately have a negative effect on the balance sheet of Italian families. Foodstuffs, petrol or diesel, transport, cannot fail to affect daily expenses. It is what also tends to highlight the Codacons , which has estimated at around 118 euros the increase in spending on foodstuffs of a typical family in Italy and of 85 euros for travel

In short, the increase in inflation has become a goal and the figures for the month of May make many “insiders” smile, interested in the performance of the European economy. But for consumers, higher costs could be coming, both for the daily expense and for the mortgage payment, if at a variable rate and indexed to the Euribor

 

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